Transcontinental Inc.

Mesdames et messieurs, merci d'avoir patienté. Et bienvenue à la conférence téléphonique concernant les résultats du troisième trimestre de l'exercice 2023 de TC Transcontinental. Pendant la conférence, tous les participants seront en mode d'écoute. Seulement, une période de questions suivra la présentation et des directives vous seront données à ce moment. Nous désirons vous rappeler que cette conférence est enregistrée aujourd'hui le 7 septembre 2023. Welcome to the TC Transcontinental third quarter of fiscal 2023 results conference call. During the presentation, all participants will be in listen-only mode. Afterwards, we will conduct a question and answer session, and instructions will be provided at that time. As a reminder, this conference is being recorded today, September 7, 2023. I would like to turn the conference over to Yann Lapointe, Director, Investor Relations and Treasury. J'aimerais maintenant céder la parole à Yann Lapointe, Directeur Relations avec les Investisseurs et Trésorerie. Monsieur Lapointe, please go ahead.

Thank you, Joëlle, and good morning, everyone. Welcome to Transcontinental's third quarter fiscal 2023 earnings call. Before we begin, please note that the press release, the MD&E, along with financial statements and related notes, as well as the slide supporting management's remarks, are all available on our website at www.tc.tc under the investor relations section. A replay of this conference call will also be available on our website shortly after the call. Please note that this conference call is intended for the financial community. Media are in listen-only mode and should... ...communications for more information. We have with us today our President and Chief Executive Officer, Thomas Morin, and our Executive Vice President and Chief Financial Officer, Donald Lecavalier. As referenced on slide two, some of the financial measures discussed over the course of this conference call are non-IFRS. You can refer to the MD&A for a complete definition and reconciliation of these measures to IFRS. In addition, this conference call might also contain forward-looking statements. These statements are based on the current expectations of management and information available as of today, and they involve numerous risks and uncertainties, known and unknown. The risk, uncertainties, and other factors that could influence actual results are described in the fiscal 2022 annual MD&A and in the annual information form. With that, I would like to turn the call over to our president and CEO, Thomas Marais.

Thank you, Yann, and good morning to everyone, and thank you for joining the call. Three months have passed since our last call, which was actually my first day as CEO, and I'm pleased to be with you again today. At that time, our executive chair, Isabelle Marcoux, and I shared with you our four priorities. Number one was to grow organically and profitably. Second is to deliver strong return on assets. Third is to reduce our debt. And fourth is to commercialize sustainable products. Aligning the organization on these four priorities has been the focus of my first 90 days, and I'm happy to report that the team has responded very well. We took quick actions to adjust to market conditions, which were more challenging in Q4 than anticipated. These actions enabled us to improve our conversion rate, mitigating the impact of lower volume on our profitability. We also made good progress on working capital by continuing to reduce our inventories, and this is a key component for us to drive our debt down. Part of my agenda was also to review our senior management structure and create a leaner, more focused, and more agile team aligned to deliver on our four priorities. And this was done quickly, and a new executive team was announced mid-August and is now fully hands-on. I also went on the road to better understand our printing business, visiting our plants, meeting our teams and our customers. I must say that I'm impressed by the engagement of our leaders and coworkers, the quality of our assets, and the strength of the relationship with our customers. This has enabled me to see more clearly the potential of our training business, and this includes our more traditional activities. All in all, I'm satisfied with the work accomplished and confident that these actions, taking this quarter and this year, will also benefit us in the long term. Now going back to our results, starting with safety. Our yearly incident rate has decreased by 23% compared to last year, which is obviously a major achievement by the team. Although significant work remains to achieve an injury-free workplace, this is obviously a big step in the right direction. Turning now to our sectors and starting with packaging. Like our peers, we were impacted by market dynamics that we continued destocking, as well as a softening demand due to the economic context. But despite these lower volumes, and thanks to our actions, profits were in line with last year. In terms of commercializing sustainability, While generating profitable growth and better return on assets, let me give you an update on our recycling strategy and come back, of course, on the investment we've announced on August 22nd. First, we took a step back to review our recycling operations and took the strategic decision to move recycling directly into our theme production facilities. By bringing recycling closer to end markets, we are reducing costs and we are better positioned to commercialize products with PCR content. With this evolution, we will be closing a Montreal recycling facility at the end of this month. Second, we've announced a major investment in a new BOP film line to be installed in Asperenburg, South Carolina facility. This new offering is a game changer for our industry and for TC Transcontinental. The superior capability of this film will give us a competitive edge and as a consequence will enable us to gain share as the market evolves towards more sustainability. We are pleased with the early interest shown by many of our key customers. Now, in the printing sector, the measures we took have resulted in significant recurring savings. On the downside, flyer volumes continue to decrease, and books have had a challenging quarter. We will continue to adjust costs to volume and take all the measures necessary to protect profitability. On the positive side, we are pleased with the rollout of our reinvented flyer radar in Montreal in May, as well as in Vancouver last month. and we are now distributing over 1 million copies of Red Earth every week. Also, in the wake of having in-source newspaper volume from Metroland earlier this year, we are taking on new volume from another newspaper publisher, Glacier Media. Glacier made this announcement to its employee earlier this week, actually. In summary, with our key focus on our four priorities and acting with speed and agility, I am confident that we are on the right path. And on that, I will pass it over to you, Donald.

Thank you, Thomas, and good morning, everyone. Moving to consolidated numbers on slide five of the earnings call presentation. A 5.5% decrease in revenues versus the same period last year. This was mainly driven by lower volume in both our packaging and printing sectors. Regarding profitability, Consolidate adjusted EBITDA for a quarter was $107.9 million, down 4.5% compared to Q3 last year, as the improvement in our packaging sector was not sufficient to offset the decline in our printing sector. We have accelerated the implementation of cost reduction and efficiency measures across the organization, and we are encouraged by what we see. As Thomas mentioned, we streamlined our management structure to better support our operation and become more agile in a fast-changing environment. These changes, in addition to the initiatives implemented at the beginning of the calendar year, have improved our cost structure and overall profitability. Taken together, these measures add up to $40 million, which is over $20 million coming from the printing sector. Financial expense increased to $16.1 million, mainly from the impact of higher interest rates on our variable debt. Adjusted income tax of $10 million was $3.2 million lower than last year and represented an effective tax rate of 18.5%. This resulted in adjusted net earnings of $0.51 per share for the quarter. Now moving to slide 6 for the sector review. In packaging, we generated revenue of $403.3 million, compared with $426.2 million last year, down 5.4%. The decline is mainly due to volume being down about 10% from continued customer destocking and recent market softness impacting most segments. However, we benefited from a stronger year-over-year U.S. dollar. In terms of profitability, despite a challenging order for volume, adjusted EBITDA in packaging was up 3% to $53.8 million, as favorable exchange rates, pricing action to recover inflation, cost savings, and efficiency improvements were able to offset volume impacts. Moving to printing on slide 7, revenues decreased by 5.6% to $273.7 million. We continued the pass-through of inflationary price increases in the quarter, but we were impacted by lower volume, mainly in our book and flyer printing activities. Printing's adjusted EBITDA was $45.2 million for the quarter compared to $52.3 million last year due to the lower volume in the quarter. That being said, we are accelerating the implementation of cost reduction measures to better position our cost base for the future. We have already realized over $20 million in annualized profit improvement initiative for the sector and the teams continue to identify and implement new actions. The deployment of radar also contributed positively in the quarter. Corporate expenses were in line with last year at around $10 million. Now turning to cash flow, we generated $109.1 million from operating activities an increase of $60 million versus last year, mainly driven by improved working capital as we continue to make progress on reducing inventories. We went from a working capital usage of $46.9 million last year to a positive $26 million this year. This is the second quarter of positive working capital in a row, and we continue to be confident in our ability to deliver strong cash flows in the fourth quarter. Our capex at $44.1 million are higher than last year, but have started to decline sequentially. We continue to expect capex of about $160 million for the fiscal 2023 net of potential disposal before returning to a lower run rate in fiscal 2024. While impacting our debt in short-term, our investments, such as the new 60 million BOP line recently announced, will provide a lasting competitive advantage and should be a key driver of our long-term growth. Despite our investments in CapEx, our net debt ratio continues to improve, standing at 250 times at the end of the third quarter compared to 2.63 at the end of January. The improvement over the last six months is mainly due to higher cash flow generation from positive working capital. Debt reduction is our priority, and we are committed to a strong free cash flow generation. Our net debt should come down to close to two times in the coming quarters. In closing, for the first nine months of the year, despite lower volume, we have delivered similar adjusted EBITDA than last year. by driving substantial cost savings and efficiency across the organization. In terms of outlook and packaging, while we expect pressures on volume to persist in the near term, we continue to expect to improve profitability in fiscal 2023. In print, we continue to expect lower adjusted EBITDA for fiscal year 2023 from the impact on inflation on volume and cost structures partially offset by the impact of the ongoing cost reduction initiative. We also expect strong performance from in-store marketing activities and a positive impact from radar in the fourth quarter. We expect corporate costs at EBITDA level to be around $40 million for the year. Moreover, cash tax will be around $60 million for the year.

On that note, we will now proceed with the question period.

Thank you, ladies and gentlemen. We will now move on to the Q&A period.

If you have a question, please press star plus one on your keyboard. A tone will be heard confirming your request. The question will be answered in the order in which it was asked. Please also make sure to unlock the receiver de votre appareil téléphonique si vous utilisez la fonction mains libres avant d'appuyer sur les touches. Un moment, s'il vous plaît, pour la première question. Thank you. One moment, please. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by the one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they are received. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. One moment, please, for your first questions. We have now a question from Mr. Amir Patel with CIBC Capital Markets. Your first question comes from Amir Patel with CIBC Capital Markets.

Good morning. Thomas, on the packaging side, I believe Donald mentioned that volumes were down 10% in the quarter. How did volumes fare in August, and when would you expect volume comps to turn positive again?

Thank you for the question, Amir. A couple of comments on that. We anticipated this stocking when we had a call in Q3, back three months ago, basically. We actually anticipated some customers to reduce in various. They had told us and sent us some warnings. These came a bit stronger than expected. So, obviously, we circled back with them and tried to – it's actually pretty focused, to be clear. And they all confirmed they would have a positive outlook for the year, all confirmed that they would grow this year and we would grow with them. Now, this impact in Q3 combined with the seasonality, in some cases, you know, the summer is not a high season for some of the packaging segments we're playing. This was larger than anticipated. This caused us to reduce costs faster. Now, your question is more forward-looking. We see an uptick in the month of August starting to recover. That was expected. The question is how long is this going to last? And is this going to be at the level we were expecting or experiencing last year? But we see an uptick in the first month of the fourth quarter going in the right direction. We'll see if it is confirmed for the remainder of the year.

Okay, great. And sorry, just to clarify, that's an uptick year over year or sort of sequentially coming off the fiscal Q3?

It is not yet back to last year in dollar terms. I need to double down on the volume piece, but it's certainly better than Q3 for sure.

Okay, fair enough. And just turning to the cost side, have you seen much benefit yet from the falling spot prices for resin? And what kind of tailwind could that be for you in 2024?

Yeah, good question. Two things to say on that. First, we've been reducing significantly our raw materials in vanities in the course of Q3, and I would say it started in Q2 as well. So we would expect to see flowing through some reduction coming from raw materials. Don't expect much, though, if you follow the resin price. Yes, the spot market has been evolving faster, but the overall resin market hasn't gone down that much yet, a little bit still. So, yes, we would expect to see some benefit from that. Difficult to estimate how much, but certainly going in the right direction, especially now we've reduced our inventories and all materials.

Okay. Fair enough.

That's all I have for now. I'll turn it over. Thanks.

Your next question comes from Adam.

Thanks a lot. Good morning.

Can we go back to the first question, maybe just unpack it a little bit related to the packaging volume? So you have two elements. One, an acceleration sequentially in the destocking, and then you also alluded to softness and volume related to just economic backdrops. So, Tamar, can we just go back to some of your answers earlier in terms of specifically around destocking? Do you think destocking as a pressure point runs its course by the end of your fiscal 2023, or can it potentially continue into F24? And then on the volume side, as it relates to the economic dynamic, are you similarly seeing, you know, an uptick or at least, you know, sequential improvement related to that factor as well. And I'll circle back with another question.

Yeah, thank you, Adam. So let's be very specific. You know, when we had some supply issues, all the industry, everybody has grown their inventories. So we grew our raw materials inventories. Our customers grew their packaging inventories. Everybody did that in the course of the last, say, two years. We ended up, both our customers and our sales, with way too much inventories as the supply chain resumed to better service levels. And when we had these discussions with them, we were talking about a month too much. If you count in number of days, it would have been about 30 days too many in terms of inventories. This has led to this reduction in the summer, and the reduction has been pretty quick. So to your question, I believe the adjustment has been done with the customers we're working with. I wouldn't make this a general statement across the industry, but as far as TC Transcontinental is concerned, I would say most of our customers have reduced pretty much their level of inventories to the right level, which is about a month, say, of inventories. So that's what I believe will drive a more, I would say, normal demand in the forthcoming months. The thing which is difficult to estimate is the impact of inflation our customers have passed on to the market. So, like we did, all our customers have passed a significant amount of inflation this year to the market, and this, at some point, may have an impact on demand. Too early to say, Adam. But that's something we obviously actively discuss with them. So far, and as what I said, all of them report steady demand and don't expect to see a reduction in volume. But at this point in time, that's still to be demonstrated.

Okay. No, I appreciate the added color. If we go back to one of Donald's additional comments earlier, In terms of outlook, he did allude to the fact that ISM should grow, which is something you've been alluding to in recent quarters. But you sort of come off the idea that book is going to grow. And obviously, you saw pressure in book in Q3. Can you just speak to what exactly transpired early in H2 and whether indeed that book pressure continues into Q4?

Yeah, I mean, we'll cover that, the two of us, with Donald. So on ISM, one quick word, the order intake and book is strong. The pipeline is strong, so it's really promising. So I confirm what, obviously, Donald said. On the book side, it's been a bit of a roller coaster. We were very busy until a few months back, and then we saw the demand reduced. Obviously, this is something we're investigating. We're adjusting our costs as we speak, obviously, to take care of that now. The team has been very quick in identifying some potential growth opportunities in books, so that's where the focus is on now, Adam. We have a good asset base, as I said, good team. We know from a quality standpoint where we should be playing. So it's all about going and hunt again, which is where the team is focusing on as we speak. Now, how long is it going to take? I'm not too sure yet, but for sure there are some opportunities.

Okay, thank you for that. I appreciate it.

Votre prochaine question vient de Drew McReynolds avec RBC. Your next question comes from Drew McReynolds with RBC. Please go ahead.

Yeah, thanks very much, Adam. Kind of ticked off a few of mine. Just to then, on the radar, Thomas or Danelle, just can you give us a little bit more granularity on what you've seen since that launch in May and, you know, how – It's contributing to results relative to what Publisac used to. And then secondly, back to packaging, maybe for you, Thomas, obviously a lot of investment going into sustainability and recyclability efforts. Do you expect a flow through to crystallizing that investment to kick in in fiscal 2024? And how confident are you in terms of kind of gaining market share within within the segments that you compete in. Thank you.

Yes, Drew, I'll take the one on radar. First, the most important thing for us on radar was the importance of securing our print product. We had a quick turnaround in Montreal facing this situation, and we're really proud of how quick we were able to react to that. And now, as you can see, we're starting to do some radar product also in Vancouver, so that's very important for us. So far, the clients appreciate the solution. We had great feedback after the first quarter of doing business with Radar in Montreal, so this is very interesting. In terms of number, obviously, we won't disclose any numbers regarding the impact on the bottom line, but what I can tell you is that distribution in Montreal for us was operating a lot before Radar, and now it's behind us, so that's good news.

Yeah, and I think it's been...

Very impressive, the speed at which the team developed the product, the connection with our customers and stakeholders, the way it's been, you know, the Vancouver example was done within a month. That's pretty impressive. All right. Second question was on the investment in sustainability and how fast can we expect to see this flowing through our growth agenda. Obviously, this is a key milestone. not only for TC Transcontinental but also, I believe, for the flexible packaging industry. The POP film provides a great deal of benefits and I suggest we have a specific event on that because there is a long list of things we can share how great this product is from a performance perspective all the way down to the total cost of ownership for customers. The process and the agenda so that we clear the line will be operational in spring next year. It's a big machine. We expect to pull the first rolls of film sometimes in March, April, and start the commercialization right after that. Now, we obviously are already working at qualifying this film with customers with a great deal of success as we speak. So the question becomes how fast is this going to be delivering growth? It's obviously part of our plan. We wouldn't do that otherwise. It's difficult to tell you exactly the date. Should we have an impact in 2024? I think the first thing will be to secure and replace the current non-recyclable films we buy today by this film. So this will bring benefits. but not necessarily visible benefits in the first year. I think it's prudent to say that. Now, in the long term, obviously, this is delivering a significant amount of additional volume, which is already something we have identified and already working on with customers. So we're already working on share gains, if you will, and it's done in line with customers.

That's great. Thanks for the added comment.

Votre prochaine question vient de David McFadden with Cormac Securities.

Your next question comes from David McFadden with Cormac Securities. Please go ahead.

Oh, great. Thank you. Yeah, a couple of questions. So when we look at the packaging business, it seems as though the organic decline in Q3 was primarily a destocking event that's over now. Is that correct? It wasn't really that much... Macroeconomic driven is more of a one-time destocking event. Is that correct?

When I look at the $41 million, to be extremely specific, I would say clearly identify two-thirds of that is destocking. That's very clear. This is something we could share with customers and we could definitely double check on. The rest, it's smaller accounts, smaller customers. Difficult to say whether this is activity related. The one thing we know, though, is that there is no share of wallet loss or very little, no customer loss. So I would say amongst the $40 million, to be clearly specific, call it $30 million is for sure the stocking period.

Okay.

And it's yet to be fully understood.

Okay. And wouldn't you characterize your packaging business as being pretty recession resilient?

Mm-hmm.

Yeah. Okay. Yeah.

Yeah, I mean, so, you know, and I would say I would be very specific on that. About, I would say more than 90% of what we do is packaging food, if you will. So this for sure is resilient. There is still some activities we do in the industrial market which is not recession resilient, and that's a minor share of what we do. The rest is food and pharmaceuticals and medical related. So this is proven to be resilient.

But where we said to be prudent, David, is that I agree that it's recession-proven, but with inflation going on right now, especially at the grocery, we're doing packaging for food, so the numbers of items that people will buy will remain the same in the next month if inflation keeps pushing in that direction. That's something that we're following closely. And obviously, we have discussion, as Thomas mentioned earlier, with our clients. But this is something to consider. So there's recession, but there's the impact of inflation. And as you know, it's regarding the price of the grocery. It's very important right now, the impact. So this is something to consider also.

Okay. So when you look at your free cash flow, obviously, you're starting to... free up some of that working capital they invested over the last couple of years. I think you invested, I think it's close to $200 million maybe. Do you think you could get a lot of that? Sorry, do you think you could get a lot of that back?

Well, obviously, if you look at the price as an example of the reason, it's not at the level it was before we invested that $200 million. So that will remain a negative impact. But for sure, as our clients are doing, and this is what we've been doing in the last two quarters, we don't need as much an entry as we needed during the supply chain issue. So that we're gaining back. And we're still going to push, and I think we can do – we did a good job so far, but we're not satisfied. We're going to push for Q4, and everyone is aware in our organization that 2024, we want to push in that direction because, as you know, priorities is paid on debt, and that's an easy way to pay down debt.

Yeah, exactly. So just on the book volume, just kind of wondering – What is driving or what drove the results in Q3 on the book side? Just a little surprise on the weakness there.

I think Thomas gave some color here, but what I can add on that is that book, a little bit like we talk a lot about the stocking on the packaging side, but this is something that happened also on the book side. You know, before, like last year and even at the beginning of this year, but mostly last year when you compare it to last year, supply chain was an issue on book. Asia was a closed market. Publisher were ordering a lot in advance. Now they're doing the same. They're just pushing down their inventory. Maybe less books are read right now because we're postcode. impact of that in this quarter. Overall, book year-to-date is still in advance versus last year, so that's good. So we still believe that book is a growing business for us, but it was a tough quarter. And operating, we had to do some adjustments also.

Okay. All right. Thank you.

Your next question comes from Stephen McLeod with BMO Capital. Your next question comes from Stephen McCloud with BMO Capitals.

Your line is open. Great.

Thank you. Sorry about that. I was on mute. Thank you. Morning. Great question so far. Great call so far. So thank you. Just a couple of follow-ups from me. Just on the packaging side, I just had two questions. Are you largely through? the destocking impact? And then secondly, on packaging, are you still seeing the ability or having the ability or needing to put through price increases?

Right. So on the destocking, I think we covered some ground already. And I will repeat that I think we've seen the bulk of it. Now, again, to be confirmed, because there was a combination of seasonality and destocking in Q3, both reversed in Q4. So far we see some of it, maybe not full of it yet. So to be continued as a discussion, at least on the destocking, I think we've turned some corner. We need to confirm that. As far as the ability to pass on price increases, I mean, we've done most of what we had to do in line with our customers and contracts. The inflation of our input costs is not decreasing, but not increasing anymore. That's what I can see today. There are a few pockets here and there, but nothing really that would cause us to pass on increases to customers at this stage. I don't see things, at least in the near term, I don't see things that would cause us to have this discussion.

Okay, that's great. Thank you. And I did dial in late, so I apologize if you already covered that on the destocking.

It's always good repeating things.

Yeah, thank you. And then, you know, sort of I'm sticking on packaging and putting all those moving parts together. You know, how do you see volumes and maybe organic growth evolving in Q4? And would you expect to see a similar level of margin pressure?

So on Q4, I'd like to rewind the tape. So Q4 versus Q3 should see a better sales volume, just because of seasonality and less of a destocking, as we said. The question really we have is Q4 versus last year, because if you remember, last year was a period of time where customers were stocking heavily. So the reason we're destocking now is that because we stocked back in the day, and that's what happened last year. So if we compare organic growth, we need to take this aside and understand how much of the growth last year, Q4, was related to customer stocking, and so that we can compare apples to apples, to make it very clear. Now, moving forward, as you've seen, we are investing in TC, Transcontinental, a lot of capacity for specific markets. We talked about sustainability. There are other market segments we're invested in. This is done in line with customer contracts and agreements. So we've always been favoring customer-backed investment, and this leads to organic growth. So to your question, this is our trajectory, and this is what we've done, and therefore we expect to see growth coming in in those specific market segments.

And maybe, Steve, to add, when you mentioned margin pressure, I think Yes, we do have margin pressure, but when we compare to last year, I would say the margins are going in a better direction than last year. And actually, when you compare our Q3 versus our Q1, where we had the same top line, the margin was way better, and all the cost efficiency that we put in place at the beginning of Q1 on the packaging side And some price increase to cover inflation are resulting in that right now. So, yes, margin pressure, but at least it's going in the right direction compared to fiscal 2022. Right.

Okay. That's great. Thank you very much.

Ladies and gentlemen, once again, if you have additional questions, please press the button

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As a reminder, if you are using a speakerphone, please lift the handset before pressing any keys. Il ne semble plus d'avoir de questions.

Monsieur Lapointe, there are no further questions at this time.

Thank you, everyone, for joining on the call today, and we look forward to speaking to you soon.

Thanks. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.